IFRS: Intangible Assets and the Rules for Recognizing Them

IAS 38: the essentials

• an intangible asset is an identifiable non-monetary asset without physical substance; identifiability means separability or arising from contractual or other legal rights;
• it is recognized if future economic benefits are probable and its cost can be measured reliably;
• internally generated brands, publishing titles and customer lists are not recognized as assets;
• after recognition — at cost less amortization; at fair value only where an active market exists;
• an intangible asset with an indefinite useful life is not amortized but is tested for impairment annually.

Who needs this in Uzbekistan

Public interest entities are required to keep their accounts under IFRS — from 1 January of the year following the year they are included in the Register (Presidential Resolution PP-282) — as are companies that have voluntarily switched to IFRS.

What counts as an intangible asset

It is an identifiable non-monetary asset without physical substance, controlled by the company and capable of generating future economic benefits. All three features must be present at the same time.

Identifiability means the asset can be separated from the company or arises from contractual rights. Control means the company is able to obtain the benefits and restrict others' access to them.

• software
• licences and rights of use
• trademarks and patents
• customer lists acquired in a transaction
• development results where the conditions are met

Recognition and initial measurement

An asset is recognized if the inflow of related benefits is probable and its cost can be measured reliably. Acquired assets are measured at cost, including the costs of preparing the asset for its intended use.

When acquired as part of a business, intangible assets are separated from the total consideration and measured at fair value at the acquisition date.

Research and development

Research costs are always recognized as an expense of the period: at this stage it cannot yet be asserted that the result will generate benefits.

Development costs are capitalized only when a number of conditions are met simultaneously: technical feasibility, the intention and ability to complete the project, probable benefits, availability of resources and the ability to measure the costs reliably.

• technical feasibility of completion
• intention to complete and use the asset
• ability to use or sell the result
• probable future economic benefits
• availability of resources to complete
• reliable measurement of costs

What is not recognized as an asset

Internally generated goodwill, internally developed trademarks, customer lists, and the costs of staff training, advertising and promotion are all recognized as an expense of the period.

The logic of the standard is that such costs cannot be reliably separated from the general costs of developing the business, and therefore from the valuation of the company itself.

Subsequent accounting and amortization

Assets with a finite useful life are amortized over that life; the method reflects the expected pattern of consumption of benefits. The life and method are reviewed at least annually.

Assets with an indefinite life are not amortized but are tested for impairment annually. The indefinite life must be justified, not merely convenient.

Impairment and derecognition

Intangible assets are tested for impairment when there are indicators, and certain categories annually. Practice shows that this is where overstatement of carrying amounts is most often found.

On disposal, the asset is derecognized, and the difference between the proceeds and the carrying amount is taken to profit or loss for the period.

How Leader Audit helps

We help companies classify costs correctly, establish a procedure for capitalizing development and prepare the justification for useful lives — so that it stands up to an audit.

For companies in technology and those working with intellectual property, this is one of the most sensitive areas of accounting.